Saturday, January 30, 2010

Even though the coldest days of the year are upon us, the sun sets later and later with each passing day. Today is cold but wonderfully clear. The front door is open and sunshine is streaming through the glass, making the dogs happy as they soak up the warmth.

In January we made the eleventh of 120 scheduled payments on the ten-year loan, and the 25th overall since we started the five-year DTM project.

At the start of 2010, our mortgage balance stood at $108,058.40. We added $2,500 to our regular monthly payment, which reduced the outstanding balance to $104,432.09 at the end of January.

Our prepayments saved us $115.80 interest in January, bringing the total realized interest savings to date to $1,701.02.

The balance is $32,663 lower than what it would be had we never made any prepayments on the ten-year loan. If we stopped making prepayments after this month, we'd still pay off the mortgage two and a half years early.

Thirty-five months remain in our five-year (60-month) goal period. The average monthly principal payment needed to meet our goal dropped this month to $2,983.77. Since the principal portion of our required monthly payment has risen above $1,100, this means we only need to come up with an extra $1,800 a month to stay on track. (I say "only" not because $1,800 is an insignificant sum, but because we had to add almost $2,400 extra each month when we started the project.)

Saturday, January 23, 2010

Some of the items listed in the "Progress to Date" section at the top of this blog may not be as self-explanatory as I had hoped. Here are definitions of the terms.

Original Loan Amount: This was the amount we financed when purchasing our home, not the amount we paid for it (we made a down payment, and also had a HELOC to bring us up to 20% equity to avoid paying PMI). This number ($204,000) obviously never changes.

Balance at Beginning of 5-year goal (1/1/08): This was the outstanding loan balance when we decided to start aggressively paying down the mortgage. The difference between the original loan amount and this amount ($188,983.82) came mainly from the portion of our regular monthly payments which was applied to the principal. Looking back, this amount seems paltry, since we only paid down the balance by $15,000 (even though we'd made over a year and a half of payments). This number is our goal starting point. This balance was covered by our first mortgage, which had a coupon of 6.0%.

Balance at Refinance in February 2009: We decided to refinance to cut our rate from 6.0% down to 4.625%, and reduced the term to ten years. The newer mortgage had an initial balance of $148,000.00.

Outstanding Balance: This is the amount we currently owe, as of the most recent mortgage payment. It changes (hopefully by growing smaller) from one month to the next.

Latest Payment Date: This is the last month we sent a mortgage payment (including any prepayments).

Latest Additional Principal Amount: This shows any amount contributed to the principal balance above and beyond our standard mortgage payment. It is my hope that this number is always at least $500.

Amount Ahead of Schedule (since refinance): This figure may not make much sense. I start with a standard amortization schedule for our ten-year loan, which excludes any prepayments. I then compare our current Outstanding Balance against the balance from the standard amortization schedule. This number represents the difference between the balance we have now, and the balance we would have had if we'd never paid anything above and beyond our required monthly payments. It's a combination of the extra principal we've paid out of pocket, along with our realized interest savings. Since I've used our refinance amount ($148,000) as the starting point for comparison, this number doesn't capture our total progress since January 2008.

Time Ahead of Schedule (since refinance): Again, I get this by comparing our current loan to the standard amortization schedule. Since we've made prepayments, our loan will be paid off ahead of the normal ten-year completion date. This shows how far ahead of ten years the mortgage will be dead.

Interest Saved Last Month: This is yet another number which I calculate by comparing our current progress against a standard ten-year amortization schedule. This shows the difference in what we paid for interest last month compared with what we would have owed in interest if we'd not made any prior principal reduction payments.

Total Interest Saved: This is the running total of the realized interest saved for each month going back to the beginning of our 5-year goal period. This is only realized interest, as there is a larger amount of unrealized interest savings compounding in the future. When we finally pay off the mortgage, we'll realize the rest of the savings.

Months Remaining in 5-year Goal: Counts down backwards from 60. One more month is deducted after we make each payment.

Average Monthly Principal Needed to Meet Goal: This is a simple calculation of the outstanding balance divided by the months remaining. This figure is the total principal needed, not just the extra amount we must add on top of our regular payment.

Tuesday, January 5, 2010

Nobody wants to be taken advantage of, or tricked, or ripped off, right?

And when I write "nobody" I assume this includes executives and board members of companies large and small, right?

So why do corporate policymakers insist on subjecting their own customers to the very same doublespeak, dishonest practices, and confusing terms that they themselves would want to avoid?

This article is the inspiration for today's post. It is intended for a US audience, but I assume similar tactics are used by companies throughout the capitalist world.

Our strategies:1. Use a credit card for everyday spending, but keep tabs on it daily and consider the money spent as soon as we use the card. Pay the balance in full, on time (early) each month.

2. Don't use a debit card. Keep a healthy buffer in our checking account (several hundred dollars), and watch it like a hawk to ensure balances and transactions are in line with our expectations.

3. Read every piece of legalese that we receive in the mail from banks, credit issuers, investment companies, and so on. Read them until I understand them. Call customer service if something doesn't make sense. Modify our behavior if needed to avoid new fees, etc, and look for a new service provider if changes in terms are not in our favor.

4. Have a minimalist cell phone. Don't use features like text messaging or web browsing. Get the cheapest plan the company offers and the free phone that comes with it. Read bills carefully each month to ensure nothing odd shows up. Ignore the latest technology and take advantage of the new features when they are several years old (and therefore cheap or free). Keep bills as low as possible (currently we spend around $30-$40 per month, which is still painful for me).

5. Save up cash to buy a car. And buy cheap used cars. And ride a bicycle as much as possible (even in January).

Sunday, January 3, 2010

First, the numbers. As in Year One, our goal for 2009 was to reduce the mortgage balance by one-fifth the amount of our balance at the start of the project. This nice, round number is $37,796.76 (one-fifth of $188,983.82). We managed to pay down the principal by a total of $39,985.39 in 2009, meaning we achieved over 105% of our goal for the year. Hooray!

$29,500 of the debt reduction in 2009 came from our own pockets as extra payments to principal. This averages around $2,460 per month. We actually had a wide variety of prepayment amounts during the year. Our lowest of $500 happened twice, and our highest of $6,500 also occurred twice. We went one month without making any payment at all (February, since we refinanced our mortgage during that month).

The principal portion of our "regular" monthly payments (not counting prepayments) continued to rise as the interest portion fell along with the outstanding balance. The principal portion rose from around $970 to over $1100 by year end. This number will continue to grow in Year Three and will be a more formidable part of our debt reduction as the number of months left in our goal period continues to shrink.

My wife and I were evaluating our "DTM" progress during our time spent traveling together over the recent holidays. Contrasting the first year (2008) to the second year (2009), we noted some shifts in our own attitudes. In the first year, the project was new, and we made some substantial changes to our routines to cut expenses and free up cash for extra mortgage payments. We were enthusiastic about the project, but weren't completely confident we'd be able to stick to the new routine after the first few months. It was a pleasant surprise to finish 2008 ahead of our goal.

By the time the second year was underway, our routine had changed. We'd adopted the habits associated with less spending and more debt reduction. In 2009 we knew what we were capable of; we just had to remain committed to our plan. Reaching our goal for the year was no longer a hopeful aspiration, but an expected outcome. In fact, despite our success in 2009, I think we may have been able to push ourselves even further than we did. Perhaps that's something to focus on for Year Three.

If anything looks to be different in the coming year, we believe it will be the uncertainty of our existing sources of income. Neither of us has any specific reason to fear we will lose our current jobs, but general employment has obviously continued to sour over the past couple of years. My wife has also enjoyed extra income from a second job during the past two summers; there is no guarantee how much contract work will be available for her to take on in 2010. While it would be unfortunate to fall behind on this project due to forces outside of our control (the whims of our employers), it's nice to know that our current practice of living well below our means (along with our emergency savings) would allow us flexibility if one of us did have to spend some time unemployed. I'll knock on wood and hope that nothing like that happens, but mentally it helps to be prepared for the worst when uncertainty is looming.

I'll close by repeating something I've said in the past, which is that our success in this project so far has come primarily from the great partnership my wife and I share. When one of us temporarily loses motivation, the other one helps keep the focus on the goal. When one of us gets frustrated with work, the other one reminds us why we're putting up with the aggravation. And both of us keep adding detail to our envisioned future life after we've put the mortgage debt behind us. Two years down; three to go. It's not that far off.

Happy 2010! This update is a few days late since my wife and I have been away visiting family during the holidays (and therefore I didn't have all of the detailed information I needed to make this entry).

I am going to make a separate entry summarizing our 2009 accomplishments, so this post will focus only on December.

We made our tenth of 120 scheduled payments on our ten-year loan in December, and our 24th overall since we started working on our five-year goal.

Our balance was $112,168.87 at the beginning of December. My wife is paid bi-weekly, so twice a year she gets three paychecks a month instead of the usual two. December was one of those happy three-paycheck months. This means we were able to add $3,000 to our our regular mortgage payment, which when combined with our regular payment reduced the outstanding balance to $108,058.40 to finish off 2009.

Our prior prepayments saved us $103.84 interest in December, bringing the total realized interest savings to date to $1,585.22.

Our balance is $30,047 less now than it would have been if we had never made any prepayments on our ten-year mortgage. If we ceased all prepayments from this point forward, we'd still pay off the loan two years and four months early.

There are now three years (36 months) remaining in our five-year (60-month) goal period. If we average $3,001.62 in principal payments every month, we'll meet our goal on schedule.

About Me

My wife and I paid off our mortgage in April 2011, three years and four months after we set this goal for ourselves. We are now working to save (and grow) an income-producing portfolio. We hope to replace our full-time employment with income from investments within the next decade.